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OPEC Deal In Jeopardy As Libyan Oil Output Nears 1 Million Bpd

Libya—whose production has been hampered by civil unrest, political divides, and oil export terminals blockades over the past few years—is now targeting to further increase its oil output. Its most immediate goal is to reach 1 million bpd of production by the end of July, which would further complicate OPEC’s desperate efforts to reduce global inventories and prop up oil prices. And its ambitions seem plausible.

Just last month, when OPEC was discussing rolling over the output reduction deal, production-cut-exempt Libya hit its highest daily production level since 2014. Earlier this week, OPEC reported that total cartel production in May was actually higher than in April, with Libya the biggest single contributor to that increase.

Analysts warn, however, that Libya’s output increase is not a for-sure thing. Production could sharply drop again, given the political rivalry between factions and the fragile security situation in country.

Both scenarios—that Libya could increase production to 1 million bpd, or Libya’s unrest could cause a drop in production—are possible. For this reason, Libya’s production over the next few months is one of the wildest wild cards for OPEC and global oil supply.

Libya’s National Oil Corporation (NOC) said this week that it had reached an interim deal with Germany’s Wintershall to immediately resume production in concession areas and related fields, which would unblock 160,000 bpd worth of production that has been shut-in for most of the past two years over a dispute between the companies.

“Total oil production in Libya as of today is 830,000 b/d, and we are targeting one million barrels by end of July, 2017 as a result of the resumption of production from the Wintershall and linked Abouatiffel fields, as well as from 103 A and Nafoora,” NOC chairman Mustafa Sanalla said in the company statement on June 13.

Libya’s ambitions are not limited to lifting output to 1 million bpd by the end of next month, thanks to the interim deal with Wintershall. It targets even higher production by the end of this year.

NOC said last month that it has a plan for three development phases to lift Libya’s oil production. The first stage plans for increasing output to 1.32 million bpd by the end of this year, at a cost of US$550 million. The second phase entails raising output gradually to 1.5 million bpd by the end of next year, for another US$1.8 billion worth of investment, plus additional US$1.2 billion in tank and pipeline replacement and maintenance. In the third development stage, Libya plans its production to increase to 2.2 million bpd by 2023, which would require around US$18 billion in investments. Related: Shale Efficiency Has Peaked… For Now

Lending credence to Libya’s future plans, it has already made progress in increasing production. In May, Libya’s average daily production was 730,000 bpd, as per OPEC secondary sources, up by 178,200 bpd compared to April. Libya, together with fellow cut-exempt Nigeria and rogue non-complying Iraq, contributed the most to OPEC’s higher production last month.

As good as this is for Libya’s oil and economy, increased oil production further stokes fears over rising global supply at a time when OPEC and friends are trying to reduce commercial oil inventories.

But according to Helima Croft, the head of commodity strategy at RBC Capital Markets, it’s too early to call Libya’s tentative oil production recovery a sustainable stable return of many more barrels on the market.

“[W]e strongly caution against uncorking the champagne just yet as some of the most powerful armed actors are not party to the agreement (most notably the western militias) and the previous political settlements have proved to be short-lived,” Croft said in a note in early May, as quoted by Business Insider.

“Hence, we reiterate our view that Libyan output will continue to fluctuate and any output increase remains at risk for reversal,” Croft said.

Currently, Libya is on track to pump 1 million bpd by end-July—830,000 bpd output as of this week plus the 160,000 bpd unblocked from the interim deal with Wintershall, according to NOC.

Currently, the question is: will a somewhat relatively stable political and security situation allow Libya to reach and maintain the 1-million-bpd production target? Will production and export facilities be free of blockades, strikes, technical issues, and militias fighting, to let Libya aim for the plan to pump 1.32 million bpd by the end of the year?

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